European Central Bank eases lending to banks

Updated on: June 22, 2012 / 11:44 AM
/ AP

(AP) FRANKFURT, Germany - The European Central Bank is making it easier for banks to take out its loans by allowing more kinds of securities to be offered up as collateral, a crisis measure that could support Spain's hard-pressed lenders but means more risk for the central bank's own finances.

The step, announced Friday, gives Europe's banks greater access to ready cash amid the turmoil of the region's debt crisis. The ECB has been offering unlimited loans at its 7-day, one-month and three-month credit offerings to steady the banking system - but banks must have something they can put up as collateral.

It said the measure would enable banks to keep providing credit to households and businesses. That's key to keeping the economy going.

Troubled banks across Europe are having trouble borrowing money normally from other banks so they can continue making loans and doing business. Other banks are reluctant to lend to them for fear they may not repay the money. Some banks have fallen back on the ECB's credit window as a last resort.

The ECB says its governing council has decided to reduce credit-rating thresholds and widen eligibility for asset-backed securities and mortgage-backed securities. Those are investments made from batches of auto loans, consumer credit, loans to companies and commercial and residential mortgages.

The ECB has already handed out some 1 trillion euro in long-term crisis loans at low interest, a measure that helped calm some of the turbulence from the eurozone crisis over too much government debt.

Commerzbank analyst Michael Schubert said the eased collateral conditions could be used by all banks in the 17 countries that use the euro - but appeared aimed at supporting the banking system in Spain, where the banks have large amounts of such securities that could now be used to tap added credit.

Spain's troubled banks have suffered heavy losses from bad real estate loans and are a key focus of the eurozone crisis. The government of Prime Minister Mariano Rajoy says it will ask the eurozone rescue fund for up to 100 billion euro in loans from the eurozone bailout fund to bail them out.

Schubert said the ratings permitted for the securities were "significantly lower" than before and that the ECB was taking on more risk of loss.

The ECB insures itself against risk of default by loaning less than the face value of the collateral, a practice known as a haircut. For instance, asset-backed securities with at least two ratings and a second-best rating of at least "A'' from rating agencies would be subject to a haircut of 16 percent. That means only 84 cents of credit for every euro of face value.

A security with a second-best rating of BBB would see haircuts of 26 percent for those backed by loans to companies, resident mortgages and consumer credit, while those backed by commercial mortgages would face a bigger slice of 32 percent.

The bank loosened its collateral standards in December ahead of making the 1 trillion euro in emergency loans to banks in order to make sure that a wide range of banks could take advantage of that money. Germany's Bundesbank, whose head, Jens Weidmann, sits on the ECB's governing council, has pointed out the additional risks that the bank is taking on by loosening collateral standards.

ECB President Mario Draghi has said that wider collateral standards adopted by the central bank during the crisis do mean added risk, but said the bank was managing those risks by imposing large haircuts to protect itself.

The ECB would suffer losses if a bank did not repay the ECB credits and the ECB found that the collateral had fallen in value and no longer covered the amount of the loan.